Aug102013
The explosive growth of peer to peer lending, the wild wild west
In the height of the housing bubble, banks were giving out loans to people with no jobs and no credit. And then if equity increased in your house then the banks would offer you a HELOC loan that would allow the borrower to cash out their equity. Then in 2008 the affordability products stopped and the ponzi scheme was over.
Since the collapse of the housing market there has been types of borrowing that has replaced the easy credit use to be at the banks for example: 401(K) loans, crowding funding scheme, farm land fraction sales, pay day loans, auto title loans (so you can pay off your car twice), and even subprime auto loans that have interest rates greater than 10%. Now, peer-to-peer can be included on this list. Unlike lending from a banks this transaction matches people with money to people with no money. The lender, usually an individual, is hoping for a high rate of return and borrower can’t qualify at the bank. There is no organizational lender, most of the time lenders are matched on-line with the lender selecting the borrowers.
Consumers Find Investors Eager to Make ‘Peer-to-Peer’ Loans
SAN FRANCISCO—At the new headquarters of Prosper Loans Marketplace Inc., the mission was spelled out on a whiteboard: “NEED $28,676,530.13.”
That is how much more Prosper wanted to lend to consumers by the end of June to hit a $30 million target. The twist: The money would come mainly from individual investors who trawl the company’s website looking for borrowers willing to pay them attractive returns.
Prosper and a bigger competitor based a few blocks away, Lending Club Corp., dominate an obscure corner of the financial-services sector called “peer-to-peer” lending, in which consumers bypass banks altogether to borrow money from other individuals. It is part of a shadow-lending system that has thrived since the 2008 financial crisis caused many banks to tighten their credit standards.
There are, of course, plenty of would-be borrowers. Lately, however, there has been even greater interest from lenders—mostly individual investors so starved for high yields that they are jumping to fund unsecured, high-interest-rate loans. Even some investment funds are getting into the game, snapping up entire loans before individual investors act.
With more money chasing the loans, lenders such as Prosper are working hard to come up with enough borrowers to meet the demand. Each month, Prosper mails more than a million preapproved loan applications. In June, the company arranged $27.5 million in loans, a bit short of its goal. In July, it originated $30.3 million.
Prosper and Lending Club together originated about $871 million in loans last year, more than double the prior year’s total and up tenfold since 2008. Lending Club says it is on track to lend $2 billion this year.
Both have turned to outside investors to fund growth. This year, Prosper raised $20 million, including $10 million from Sequoia Capital, a venture-capital firm. In May, Google Inc. led a group that invested $125 million in Lending Club. Previous backers include John J. Mack, Morgan Stanley’s former chief executive, who serves on Lending Club’s board, and venture-capital firm Kleiner Perkins Caufield & Byers, whose partner Mary Meeker also is a director. Lending Club plans to branch into small-business loans and to take itself public.
It’s the same story in the age of Quantitative Easing (QE) and the Zero Interest Rate Policy (ZIRP), savers are trying to earn more than a 1% yield offered by the banks. So, now you have savers assuming the role of the credit card companies, pay day loan operators, and SBA lenders. A function in the past that was primarily performed by banks.
OK, how does this relate to housing, this concept is spreading to mortgages.
National Family Mortgage Achieves $100M in Peer-to-Peer Lending for Real Estate
BOSTON, MA–(Marketwired – Jul 15, 2013) – National Family Mortgage (http://www.nationalfamilymortgage.com) today announced that it has facilitated over $100 million in peer-to-peer lending volume, less than four months after passing $75 million in March 2013. National Family Mortgage expects to pass $200 million in peer-to-peer home loans during 2014.
“Baby Boomers seeking stronger investment yields continue to recognize the benefits of investing in their family. At the same time, as the residential real estate market heats up and institutional home loan interest rates rise, both Millennials and Generation X recognize the numerous win-win benefits of borrowing money from their family,” said National Family Mortgage CEO, Timothy Burke. “National Family Mortgage will continue to launch innovative financial products that save families money, and we will continue to efficiently serve the Financial Advisors, Tax Professionals, and Estate Planners, who value our fee-based solutions.”
Most National Family Mortgage clients report using their intra-family mortgage loan to purchase a home. Typical use cases include: (A) down payment loans secured as second mortgages, (B) one hundred percent financing, and (C) seller financing. Other National Family Mortgage clients report using their intra-family mortgage loan to refinance an existing bank mortgage, or to complete a home improvement project.
This company specializes in family to family which can make Christmas and Thanksgiving interesting if there is a default involved. But this is a growing industry as new investors take more chances to earn yields. This type of lending is also very risky for the lender that holding a 100% LTV loan when borrowing will probably increase in the future.
Starting in 2014, the Consumer Financial Protection Bureau (CFPB) could regulate these peer-to-peer mortgages. The lender might have to originate the loan under comply with Qualified Mortgage rules just like a bank. If they don’t they might not have Safe Harbor protection and might be exposed to damages by the borrower! Basically, lender has responsibility to ensure borrower can repay the loan. In addition, seller financing will be more regulated and be interesting to see if any borrowers sue their lenders for improper underwriting in the coming years. Is the purpose of this Frank-Dodd regulation to make peer-to-peer lending and seller financing more difficult and return this lending back to the mega-banks? I do think the purpose of this regulation just not about stopping risky lending, its to make smaller lenders comply big and expensive bureaucratic rules where they have a harder time to complete with mega banks.
Mike
The Fed’s Money Trap
Housing is perhaps the canary in the coal mine telling us that things are not going well and danger is close by.
http://www.americanthinker.com/2013/08/the_feds_money_trap.html
Mortgage rate spike finally hits housing
A sharp jump in mortgage rates from May to June are now beginning to weigh on the housing recovery. The two-month delay can be attributed to several factors—first and foremost that most potential home buyers lock in mortgage rates early, and sale closings can take up to two months to be finalized.
Second, there may also have been a surge in homebuying because of the rise, as those on the fence suddenly jumped in, fearing rates would continue going up and they would be priced out of the market. Those factors have now expired.
“We saw an increasing number of comments suggesting the sharp rise in mortgage rates has led to a pause in demand, with many agents saying the initial urgency they saw from buyers as rates moved higher has subsided and now buyers are stepping back to re-evaluate their options,” said analysts at Credit Suisse in their monthly survey of real estate agents. They noted a drop in buyer traffic in July, the first time since last December that it didn’t exceed expectations.
While buyers may be pausing, however, their optimism is not. Americans are increasingly hopeful about housing’s return. Sixty-two percent believe mortgage rates will go up over the next year, according to a new Fannie Mae survey, but 74 percent also say it is now a good time to buy a house, an increase in both from June.
“Consumers have taken the interest rate rise in stride. Expectations for continued improvement in housing persist, and sentiment toward the current buying and selling environment is back on track from its dip last month,” said Doug Duncan, senior vice president and chief economist at Fannie Mae. “These results are consistent with our own analysis of previous housing cycles, which finds that interest rates and home prices are not strongly correlated.”
Obama’s mortgage plan under fire from left and right
The most important question to ask about the Obama administration’s proposals to wind down Fannie Mae and Freddie Mac and reform mortgage finance in the United States is quite simple: Will it work?
The basic outline of the plan is that Fannie and Freddie will get out of the business of insuring new mortgages. In their place will be some sort of private sector investment or insurance that will take the first loss on mortgage-backed securities, backed up by a government insurance agency that will cover any losses beyond what is covered by private insurance.
This is more or less what is called for in the bill introduced by Senators Mark Warner and Bob Corker. That proposal has come under widespread criticism, with both Peter Wallison of the American Enterprise Institute and Yves Smith lambasting the plan.
Wallison’s main argument is that the political dynamics that led to the insolvency of Fannie and Freddie will simply return and recreate the same problems all over again.
A major feature of Corker-Warner is the requirement that the private sector share the insurance risk with the new FMIC. The bill specifies that a private risk-sharer like a bond insurer must take the first losses, no less than 10 percent on any securitized pool of mortgages. This is intended to protect the FMIC against losses, though it works only if the quality of the mortgages remains high.
But as with Fannie and Freddie, the quality of the mortgages will be the weak link. Realtors, home builders and community activists all want as many home buyers as possible. They are not concerned with fuddy-duddy obstacles like down payments, solid credit scores or low debt-to-income ratios. These interest groups and Congress will press the FMIC to lower its underwriting standards so that more and more loans can be insured.
The private bond insurer or other risk-sharer will understand the downside potential of low-quality loans and will charge for the additional risk. That cost will be incorporated into the mortgage, increasing the monthly payment and making the cost of mortgages too high for many potential borrowers.
The result? Congress or the administration or both will pressure the FMIC to lower its insurance fees so that the maximum number of people will be able to buy homes. Recall that the Federal Housing Administration required 20% down payments when it was born in 1934. It now requires a 3% down payment—and a government bailout
I say let anyone led to anyone as long as they understand there is no backing from the fed or the government if people default. You lend at your own risk. I’m sure loan origination percentages will drop like the proverbial lead ballon.
As for me whenever I lent money to family Or friends i either got 1/2 back and conveniently the rest was “forgotten” about or sometimes I got nothing back because hey were family or I paid you back. Well really you didn’t you did make a few half hearted attempts but that surfboard or the dirt bike took precedence over paying me back. But yeah we’re family so wha the hell. I only work for my money. And everyone got butthurt when the bank of me closed its doors and stopped lending.
To this day now I follow the old mantra never a lender or borrower be. Family and friends are the worse people to lend to. I guarantee you if uou never want to see a relative again lend them some money.
If I lend someone $100 today and never see them again it’s the best $100 I ever spent
I don’t understand why everyone assumes that just because the Fed tapers (stops buying RMBS and UST), the mortgage rates will automatically rise by x percent. The logic goes like this: The Fed is buying 40B per month of MBS and when they stop the bond prices will drop and cause the yields to rise. The same is said for the Treasury market.
But I think one important factor is being ignored: origination volume. When rates started rising in May, refinance and purchase applications fell. This is the same as saying borrowing demand fell at higher rates (prices). The amount of money chasing yield has not decreased. It has in fact increased since May as origination volumes have fallen.
While the 10yr UST is often compared to the 30yrFRM as an alternative, how do the volumes compare? As the US starts to delever over the next 10 years, stops expanding its debt, or at least at the same rate, the treasury market won’t have enough supply to meet the growing demand, and yields will fall as prices get bid up.
Since purchase and refinance volumes fall as rates rise, and falling home prices follow rapidly rising rates, the only way for mortgage originators to increase volume is by DROPPING RATES. This is true irrespective of what the Fed does.
For example: let’s say that I have $10B/mo. to invest (I wish). My origination volume has dropped by 30%, so I am only able to invest $7B @ 4.5% = $315M interest. In May I could invest $10B @ 3.5% = $350M/yr interest. So I am now my net yield has dropped to 315/10000 = 3.15%. Plus I have $3B that is just sitting there. I try to buy Treasuries, but everyone else is doing the same thing, this drives down the price of treasuries further dropping the available yield. So what do I do with my $3B? If I drop the rate on my Jumbo originations back down to 3.5% then I can get $3B @3.5% = $105M extra income. This raises my net yield to (315+105)/10000 = 4.2%. Risk is not as big an issue since these loans typically require 20-25% down, and if income and assets are verified, then a government guarantee is not as big a deal. People talk a lot about risk, but in a drawn out economic malaise you are much more likely to perish from starvation of yield than you are to suffer some catastrophic financial injury.
I think there is a supply and demand phenomenon for the capital aspect of the real estate market just as there is a supply and demand interplay between homes for sale and ready buyers. If the capital costs are priced correctly, then returns are optimized, more homes transact, more purchases are funded, and refinances might even occur.
” As the US starts to delever over the next 10 years, stops expanding its debt, or at least at the same rate … “
Seriously?
Between the sequester and tax increases in January of this year net annualized borrowing was down to 928.7B in 2013Q1 (BEA Table 3.2, line 45). In 2012QIV it was at 1,198.3B. In 2011QII it was at 1,471.1B. Sequester cuts didn’t even start to kick in until 2013QII. So yes, seriously.